Banks bounce back with help from Feds

U.S. banks made more last year than they lost during whole subprime meltdown – and the government helped them do it.

According to Bloomberg LP, the four biggest U.S. banks collectively earned $2.4 billion from mortgages in 2012. That number outpaced the $2.1 billion these same banks had to dole out in loan modifications and settlements.

“This is by design,” said Dr. Mark Zandi, chief economist at Moodys Analytics. “The Federal Reserve lowered interest rates and it cajoles people to take more risk. I think the Fed is pretty happy with that.”

This January, when major U.S. banks were set to announce their 2012 fourth quarter earnings, analysts armed with data of slowing originations predicted fallout from government settlements and charge offs.

But then on January 11, Wells Fargo & Company, the country’s largest mortgage lender, reported $5.1 billion in net income for the 4th quarter, a 25 percent increase.

Mark Zandi

In fact, after factoring in loan modifications and a settlement agreement with the Federal Government from the Independent Foreclosure Review, Wells Fargo’s 2012 income was up 19 percent over the year before at 18.9 billion.

“This time last year, I said we would benefit from the many opportunities we saw for 2012,” said John Stump, chairman and CEO of Wells Fargo in a statement. “And we did just that.”

The opportunities Stump may be referring to are the margins Wells Fargo, Bank of America, J.P. Morgan-Chase and others have made off historically low interest rates set by the Federal Reserve, but haven’t passed onto mortgage customers rushing to re-finance.

With most banks providing loans for refinances and not purchases, the capital risks going forward are minimal, pleasing investors. In the last year, shares of Wells Fargo rose 15.06 percent while JP Morgan’s stock jumped 26.23 percent. Bank of America outdid them both combined, with shares increasing 64.36 percent.

Despite a $2.7 billion settlement with Fannie Mae and a $1.1 billion payout for IFR, Bank of America reported earnings of $0.7 billion in net income for the 4th quarter and $4.2 billion for all of 2012; a rise of almost $3 billion over 2011.

“We continue to grow our originations business,” said Terry Francisco, vice president of Corporate Communications for Bank of America.

“We were able to grow that for the third straight quarter. Currently about 80 percent of our application activity is refinance. We are looking for opportunity to do more purchase mortgage but we haven’t seen the market turn as of yet.”

When the purchase lending market will take that turn is anybody’s guess, and that has some analysts concerned. They say it is just a matter of time before the pool of more qualified customers begins to thin out.

“On average we’ve probably peaked based on the origination volume that we’ve seen,” said Anthony Polini, a banking analyst with Raymond James & Associates Equity Research. “I don’t think we are going to see another re-fi wave because it doesn’t look like we’re going to test lower mortgage rates.”

Anthony Polini

Expectations are that present rate margins are not sustainable and with many Americans still with debt thresholds above 45 percent of their income, mortgage originations will continue to fall, as this group won’t qualify for loans in the new lending environment.

The Census Bureau has reported that new housing starts are up 28.8 percent for December 2012 over the year before, so there is also risk of there being large amounts of unsold inventory as time goes on. “I do believe there is a housing recovery, but I think that those that are more optimistic about it are going to be proven wrong,” said economist Nouriel Roubini on Bloomberg Television. “At the peak it was six percent of GDP, right now it’s only two percent.”

But despite this possible negative scenario, some experts remain solidly optimistic. Zandi, speaking at the 2013 Real Estate Economic Forecast of the Appraisal Institute, said with sections of Dodd-Frank financial reform taking shape, he did not expect a recession before 2020. He said that banks should continue to lend more, feeding a growing economy.

“The regulatory environment is settling down, it is much less uncertain than it was a year ago and will be less a year from now,” Zandi said. “Regulators realize that if you put too much pressure on the banking system, they won’t provide the credit for the growth we need.”

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